The objective of this study is to empirically examine the impact of financial innovation on bank risk-taking in the MENA region, while analyzing how this effect is influenced by different macroeconomic conditions.
Using a panel dataset covering 19 MENA countries from 2000 to 2021, the study employs robust econometric techniques, including ordinary least squares (OLS), fixed-effects (FE) and instrumental variable (IV) regressions, to examine the direct and conditional effects of financial innovation on bank risk. Financial innovation is measured using on patents and FinTech indicators, while macroeconomic conditions are captured through inflation, GDP volatility and financial liberalization.
The study shows that financial innovation reduces banks’ insolvency and earnings volatility risks, but simultaneously increases liquidity and funding mismatch risks. Furthermore, we show that the relationship between financial innovation and bank risk is highly dependent on GDP volatility, inflation and capital controls, such that the actual sign of the marginal effect changes. Financial openness also mitigates this relationship, but not enough to reverse the sign.
This article makes new contributions to the literature on the MENA region concerning the relationship between financial innovation and bank risk, and formulates recommendations for the MENA banks and policymakers.
